Economists say that the Federal Reserve will use its Jackson Hole retreat to lay out a plan for slow easing that will start at its meeting in mid-September. This comes before the two days of talks that begin on Friday.
The Fed’s plan is very different from the rate cuts that the market thought would happen after the weak July jobs report came out at the beginning of the month.
Derek Holt, vice president of Scotiabank Economics in Toronto, said, “The word of the day is likely to be gradual.”
Economists say that Fed Chairman Jerome Powell will give the all-clear for future easing in a speech on Friday that starts the Jackson Hole seminar.
Before his speech, other Fed officials started to make plans for how policy is likely to change.
In favor of a slow pace was San Francisco Fed President Mary Daly.
She said, “Gradualism is not weak, it’s not slow, it’s not behind; it’s just smart.”
Aditya Bhave, a senior U.S. economist at Bank of America Securities, says that “gradual” means that rates will go down by two quarter points this year and then by one quarter point every three months next year.
The Fed’s main rate has been between 5.25% and 5.5% since July of last year.
The people who trade on derivatives markets are not on Team Gradual. Rates will be cut by 100 basis points by the Fed in December and by 200 basis points by June of next year.
“It’s hard to tell what the market is expecting right now,” Bhave said.
He said that there are two main ways the economy could go. The first is that the economy is still stuck in a rut, with 2% growth and job losses. The other is a slump, which would cause rates to drop quickly.
It’s up to the markets to set prices that are somewhere in the middle of these two possibilities, he said.
Doug Porter, chief economist at BMO Capital Markets, said that he thinks the Fed’s base rate will be lowered several times until it reaches a range of 4%. After that, rates will be lowered more slowly until they reach 3%, which is considered a neutral rate, in 2026. There are 9 cuts in all.
Carl Tannenbaum, chief economist at Northern Trust, said Powell will tell markets again to “stop overreacting” to the data.
This month’s weak job report sent shockwaves through the world’s financial markets, causing the Dow Jones Industrial Average to drop more than 600 points.
“I thought the market overreacted to the jobs report in one of the worst ways I’ve seen in a long time,” Tannenbaum said. With just one piece of information, the markets jumped at the idea that the economy is weakening.
He said, “They were just looking for a story, and they made one up based on one job number.”
A short time after the jobs report, there was talk of a run of 50 basis point rate cuts and a last-minute cut in the Fed rate. In the last two weeks, feelings have cooled down.
Tannenbaum said Powell would stress how strong the economy is still. The head of the Fed will say that a 25-basis-point cut is likely to happen in September.
“Powell will also say things that make it sound like that size of a move is probably right for now and that it would be silly to think about anything bigger unless something unexpected happens,” Tannenbaum said.
Powell will also say that the Fed is still worried about inflation.
Tannenbaum thinks that the policy meetings left this year will have three 25-basis-point rate cuts. The outlook for 2025 is still too cloudy for a precise guess, but he said, “I don’t see the urgency to cut rates by large chunks.”
